What is Forex?
Forex Trading, is a combination of Foreign and Exchange.
It is where businesses, governments, investors, and individuals buy or sell currencies.
In simple words, when you want to travel from Asia to Europe for vacation.
So you purchase the euros or exchange cash to get the local money of your vacation destination.
While you are doing this you’re taking part in the forex or foreign exchange (FX) market.
Businesses and individuals often do this while investors trade currencies to profit from fluctuating exchange rates.
Infact, there’s no single place to trade forex, it is decentralized .
Basically operates through a global network of banks, financial institutions, and individual traders who trade electronically.
And guess what?
- It is the biggest financial market in the world, almost $7.5 trillion is traded here every single day.
- Plus it runs 24 hours a day, for 5 days a week!
How can one make money with Forex?
What is Forex?
Forex, is a combination of Foreign and Exchange.
It is where businesses, governments, investors, and individuals buy or sell currencies.
In simple words, when you want to travel from Asia to Europe for vacation.
So you purchase the euros or exchange cash to get the local money of your vacation destination.
While you are doing this you’re taking part in the forex or foreign exchange (FX) market.
Businesses and individuals often do this while investors trade currencies to profit from fluctuating exchange rates.
Infact, there’s no single place to trade forex, it is decentralized .
Basically operates through a global network of banks, financial institutions, and individual traders who trade electronically.
And guess what?
- It is the biggest financial market in the world, almost $7.5 trillion is traded here every single day.
- Plus it runs 24 hours a day, for 5 days a week!
How can one make money with Forex?
It’s pretty straight forward
Let’s get back to your Europe trip.
Later, when you return home, you exchange your leftover euros back into your local currency.
But wait!
The exchange rate has changed.
If the euro became stronger while you were away, you’d get more dollars back.
If it became weaker, you’d get less.
This is exactly how Forex trading works!
But instead of exchanging money for travel, Forex traders buy and sell currencies to make a profit.
They try to predict which currency will rise in value and which will fall.
If they’re right, they make money!
But What are Currency Pairs?
In Forex, you always trade two currencies at the same time.
That’s called a currency pair.
Think of it like a see-saw. If one side goes up, the other goes down.
For example:
GBP/JPY = British Pound vs. Japanese Yen
In every pair:
- The first currency is called the base currency (GBP)
- The second currency is called the quote currency (JPY)
In simple words if the pair is trading at 185.50, that means:
1 British Pound = 185.50 Japanese Yen
When you trade this pair,
You’re betting one currency will get stronger than the other.If you think the GBP will go up compared to the JPY, you “buy” the pair.
If you think the GBP will go down, you “sell” the pair.
Say You believe that GBP will go up from the current 1.1000.
Later, the price moved to 1.1050.
You close your trade and make 50 pips in profit.
So in Forex, you're always trading one currency against another, that’s why it's called a pair.
Now it doesn’t end here, there are three main types of currency pairs in Forex:
1. Major Pairs
These are the most traded currency pairs in the world.
They always include the US Dollar (USD) on one side.
Examples:
* EUR/USD (Euro / US Dollar)
* USD/JPY (US Dollar / Japanese Yen)
They have high liquidity and lower transaction costs.
2. Minor Pairs (or Crosses)
These do not include the US Dollar, are still commonly traded but have slightly less volume.
Examples:
* EUR/GBP (Euro / British Pound)
* GBP/JPY (British Pound / Japanese Yen)
3. Exotic Pairs
These pair a major currency with the currency of a developing or smaller economy.
Examples:
* USD/TRY (US Dollar / Turkish Lira)
* EUR/INR (Euro / Indian Rupee)
They can be more volatile and have higher spreads (costs).
So when you trade Forex, you're usually dealing with one of these three:
Majors, Minors, or Exotics depending on what currencies you're working with.
Pips, Lot Size, Leverage, and Spreads.
There are a few terms that traders hear all the time.
But no one really explains them in a way that actually makes sense to someone who's new.
Let’s fix that.
Pips first.
A pip is basically the smallest price move that a currency pair can make.
It’s like how stocks move in points, currencies move in pips.
Now, most forex pairs are priced up to 4 decimal places.
So if GBP/USD moves from 1.2400 to 1.2401 — that 0.0001 change is 1 pip.
But with certain pairs and instruments like Gold (XAU/USD)
They’re priced only up to 2 decimal places.
That means if the gold price moves from 1960.25 to 1960.35, it has moved 10 pips.
Got it. Here’s a clearer, smoother version without bold text or overly short sentences, keeping it simple but well-explained:
Next up Lot Size,
In trading, “lot size” simply means how big your position is.
When you’re trading gold (XAU/USD), the trade size is measured in ounces of gold.
There are typically three lot sizes traders use:
- A standard lot means you’re trading 100 ounces of gold.
- A mini lot is 10 ounces.
- And a micro lot is 1 ounce.
So, if you open a trade with 1 lot, you’re controlling 100 ounces of gold.
If gold is priced at $2,300 per ounce, your total position value is 100 × 2,300 = $230,000.
That’s how much gold you’re trading.
Now let’s understand how lot size affects your profit or loss.
Gold moves in pips.
As we just explained, In gold, 1 pip is equal to 0.01.
So if the price goes from 2300.00 to 2300.10, that’s a 10-pip move. The value of each pip depends on how big your lot size is.
- For a 1 lot (100 ounces), each pip is worth $1.
- For a 0.10 lot (10 ounces), each pip is worth $0.10.
- For a 0.01 lot (1 ounce), each pip is worth $0.01.
This means if gold moves 10 pips and you’re trading 1 lot, you make or lose $10.
But if you’re trading just 0.10 lot, that same move would mean a $1 profit or loss.
Now, here’s where leverage comes in.
Most traders don’t have hundreds of thousands of dollars lying around.
To make larger trades with smaller capital, brokers offer leverage.
Let’s say your broker gives you 1:100 leverage. That means for every $1 you put in, you can control $100 in the market.
So to trade a 1 lot position in gold which is $230,000 you only need to deposit $2,300 (that’s 1% of the full value).
The rest is covered by leverage.
This sounds powerful, but there’s a catch.
If gold moves just $23 (or 2,300 pips) against you, you lose your entire $2,300.
That’s a 1% move in the market and it wipes out your capital.
That’s why leverage is both an opportunity and a danger.
It lets you trade big with small money, but it also means small price movements can lead to big losses if you’re not careful.
Spreads.
You never buy or sell a currency pair at the exact same price.
There’s always a difference between the price at which you can buy and the price at which you can sell.
That difference is called the spread.
It’s how brokers make money, kind of like a convenience fee.
So the moment you enter a trade, you’re technically in a small loss and your trade needs to move a bit in your favor just to break even.
For example, if GBP/JPY is at 190.60 to buy and 190.58 to sell, that’s a 2-pip spread.
You’re already down 2 pips the moment you enter
you need the market to go up by at least 2 pips to just come back to zero.
These terms may seem boring at first, but once you understand them, you’ll realize they’re the basics that every trader needs to know before jumping in.
